An Austrian recession a'comin'

We are not huge fans of macroeconomics around here. Not because we think the various theories are all wrong, quite the opposite. There're truths in pretty much all of the varied theories about recessions and booms we feel. The disutility of the subject coming from the fact that it's near impossible to know which model is appropriate to explain any one particular event - making the diagnosis of the appropriate cure somewhat difficult.

Our view thus tends to retreat back to Adam Smith, peace, easy taxes and tolerable justice are the things to aim for in economic management. We might add a bit more about public goods, externalities and the prevention of monopolies but that is roughly the set of tools we think we've got which are useful. And certainly they're the ones we think should be concentrated upon.

However, we are not exclusive about this. Given that we do think there are truths in some models at times it is possible to identify the correct model and thus the correct solution. Larry Elliott is calling the top for the Chinese economy with the signing of Oscar from Chelsea. No, we're not sure about that top. But we are about this:

.."the debt super cycle is over when the cost of malinvestment and misallocation of capital outweighs the benefit of good credit creation." 

Which is the Austrian view of a recession of course. China has indeed enjoyed a massive boom as the idiocies of Maoism were dropped and free markets allowed reign. And it has been those markets - the thumbnail sketch is that the state directed economy continues but ever shrinks as a portion as the free market one grows up around it.

But this can hit the buffers and when it does it will be for that Austrian reason. Having identified it we can then apply to appropriate salve. Which is liquidationism. Those misallocations have to be unwound. That Keyneisan solution to a recession, demand boosting management, is not appropriate as that isn't actually the problem. It becomes instead extend and pretend.

We end up with the rather gloomy prediction that perhaps China should have a recession.